AIP - 86: Swap EURC to bERNX

This is a vote to:

• add bERNX by Backed as a collateral in the Transmuter
• adjust Transmuter oracles to include deviations for every oracle and facilitate the conversions of EURC into EURA with no fees and extra slippage
• swap 7m EURC from the Transmuter into bERNX by Backed

Context

On EURA Balance sheet

The balance sheet or EURA looks like the following: | | EURA | | Today | Target | |-------------------|:-----------------|:-----|----------:|----------:| | Allocation | Transmuter | EURC | 12,455,569 | 5,311,956 | | | | bC3M | 6,858,389 | 7,001,001 | | | | bERNX | - | 7,001,001 | | | Borrow Module | | 4,270,411 | 4,270,411 | | | AMOs | | 1,156,756 | 1,156,756 | | KRIs | Liquidity Ratio | | 258% | 110% | | | Capital Ratio | | 732% | 217% | | Secondary Metrics | Capital surplus | | 1,745,644 | 1,745,644 | | | Total Assets | | 24,741,124 | 24,741,124 | | | Capital at Risk | | 245,598 | 813,228 | | | Asset / Capital | | 7.06% | 7.06% | | | Liquidity Outflow | | 4,829,051 | 4,829,051 | | | Liquid assets | | 12,455,569 | 5,311,956 |

The change in allocation proposed here is calculated to maximize balance sheet yield while maintaining a healthy buffer for both credit and liquidity risks.

Credit Adequacy

Both bERNX and bC3M are designed to have very limited credit risk. As such, applying Capital at Risk percentages of 1% to bC3M and 3% to bERNX at the new allocations (along with conservative numbers for the Borrow Module collateral) leave the protocol with a healthy Capital Surplus buffer.

Liquidity Adequacy

In order to determine there is adequate liquidity in the protocol, the Steakhouse Financial team computed the maximum liquidity outflow that happened historically during the time period needed to liquidate the ETFs (estimated at 3-days).

Based on history (excluding the Euler hack), there were 3 historical occurrences of >15% drawn down in market cap within 3 days, 0 occurrences >21% in 3 days. So in order to balance stability and asset allocation optimization, we proposed a constant liquidity ratio of at least 21%.

On Transmuter oracles

Transmuter looks into two oracles for every asset, and it keeps for each asset in the backing a target and a current price. Whenever the current price of one collateral deviates from the current price, the deviation is reported when people burn EURA for any other asset. Typically if EURC trades at 0.99 instead of 1€, then people burning EURA for bC3M will also face a 1% deviation on the burn price.

We propose here to adjust the oracle methodology within Transmuter to include a deviation threshold below which no deviation is actually reported. Typically, if bC3M deviates by 10bps from its target price (taken as the maximum price ever observed for the asset), then people may still burn 1 EURA for 1 EURC with no extra fees taken.

Proposal

The proposal is to:

• add bERNX by Backed as a collateral in the Transmuter
• adjust Transmuter oracles to include deviations for every oracle and facilitate the trading with no fees from EURC to EURA back and forth with no fees
• swap 7m EURC from the Transmuter into bERNX by Backed

Implementation

This proposal implies multiple changes in the protocol.

Transmuter exposures

Adding bERNX implies modifying Transmuter fees, here is the proposed breakdown.

TL;DR:

• for EURC: max exposure at 70% (so we don't block someone who would do a large mint to much), min exposure at 10%
• for bC3M: max exposure 50%, min exposure at 25%, no mint fees, burn fees at 50 bps to compensate for acquisition costs
• for bERNX: max exposure 50%, min exposure at 25%, no mint fees, burn fees at 50 bps to compensate for acquisition costs

This is what would be enforced onchain and more the security measures in terms of the max that we want to have on the protocol.

New Transmuter rebalancing rules

The rebalancing rules would have to be set through offchain coordination, and rely on the setup we voted in the past with the guardian to subsidize the acquisitions of tokenized securities when exposures go beyond certain thresholds. It's this setup that we'd use to sponsor the acquisition of 7m of bERNX. By the way, this imply transferring 10k more EURA from the treasury to cover for potential fees (given the 21k EURA remaining on the protocol balance sheet).

Ideally we want 35% in IB01, 35% in ERNA, the 30% remaining in EURC With this:

• if EURC exposure is above 40%, we rebalance till 30% exposure to EURC
• if EURC exposure is below 15%, we rebalance till 30% exposure to EURC

Transmuter oracles

With the deviation setup mentioned above, we propose to update the oracles for all the collateral assets with the following conditions:

• for EURC: we take a base rate of 1 and apply no deviation when EURC trades plus or minus 5bp with its current price (Pyth oracle)
• for bC3M: we use Redstone oracle and then compare this rate with the ATH observed for this token as the target price, with no deviation reported when current price is within 50bp of the max price
• for bERNX: we use Backed oracle and then compare this rate with the ATH observed for this token at the target price, with no deviation reported when current price is within 100bp of the max price ever observed

Value to the protocol and risks

This proposal:

• Increases risk by reallocating towards bERNX and bC3M to capture a higher yield
• Decreases EURC exposure to reduce non-yielding assets while keeping sufficient liquidity

But:

• will improve the stEUR yield to up to 6% (all else equal and assuming 100% distribution)
• will reduce the frictions for people looking to get in or out of EURA through EURC swap as these should come with the added deviation tolerance parameters with no fees

Voting options

1. For, add collateral
2. Against, do nothing